Pivotal Week for U.S. Retail Kicks Off on Right Foot: Will Earnings Follow Suit?

• Retail sales in the US have been resilient in the first half of 2023, despite concerns about a recession
• However, there are some warning signs that signal a slowdown in the coming months
• Earnings from retail giants this week will shed light on the economy and the retail sector's current state

The pivotal week for US retail is underway. As key industry leaders unveil their financial performance, coupled with today's pleasantly surprising retail sales figures, a sense of optimism pervades the market.

In another notable development earlier today, Home Depot (NYSE:HD) managed to surpass earnings expectations, notwithstanding a decline in its sales figures.

Investors and analysts will now shift their attention to the upcoming financial reports from major market players including retail giants such as Walmart (NYSE:WMT) and Target (NYSE:TGT), technology stalwart Cisco (NASDAQ:CSCO), retail powerhouses TJX Companies (NYSE:TJX), and e-commerce titan JD.com (NASDAQ:JD).

The US retail sales data for the first half of 2023 presents a story of economic resilience. It commenced with a robust 3.2% surge in the opening month of the year. Although there was a modest contraction of nearly 1% in retail sales for February and March, a vigorous recovery emerged from April onward. July's data surpassed expectations with a 0.7% growth against the anticipated 0.4% rise.

This streak of four consecutive months of retail sales growth, notably exceeding expectations, underscores an unwavering spending trend that bolsters demand-driven inflation. Moreover, June's retail sales were revised from 0.2% to 0.3%.

US Retail Sales

The data showing an upward trend since the beginning of last year also supports the idea of putting aside concerns about a recession. However, there are still warning signs indicating the possibility of a recession.

Various campaigns aimed at boosting spending during the summer months have contributed to the increase in retail sales. Yet, there are forecasts suggesting that this spending momentum might not be sustained in the coming months.

While promotions designed to encourage deferred spending and discounted product sales have played a role in boosting retail activity, the rise in interest rates and energy expenses are factors that are pushing prices higher.

The current situation suggests that consumers could potentially reduce their spending after the summer period, which might lead to a slowdown in the economy. The return of recession speculations, which had been temporarily set aside, is now a topic of discussion again.

In the context of elevated interest rates and persistent inflation, consumers may have increased spending due to expectations of further price increases in the near future. To some extent, the resilience in retail sales data in 2023 could be attributed to this trend.

Furthermore, according to some experts, households aiming to make the most of various opportunities have directed their savings toward consumption. JPMorgan CEO Jamie Dimon interprets this as an indication that US citizens will deplete their savings by the end of the year.

Dimon asserts that concerns about a recession will intensify further if retail sales decline. However, it's important not to overlook the fact that the US labor market remains robust, and wages are increasing.

This is an additional factor that alleviates concerns about a recession by providing crucial data that supports ongoing consumption.

Considering these interpretations, consumer spending accounts for a significant two-thirds of the US economy. As a result, the earnings of retail giants can offer crucial insights into the US economic outlook.

Walmart

Walmart, the biggest retailer in the US, and another company whose earnings are on the horizon this week, successfully boosted its sales and revenues, outperforming its rivals thanks to its wide range of products offered throughout the year.

As a result, Walmart's outlook seems more favorable. Analysts anticipate a profit of $1.71 per share for the upcoming August 17 announcement, along with an expected quarterly revenue of $159 billion. Comparatively, in the last quarter, Walmart's revenue surpassed expectations by 10%, reaching $152.3 billion, and its EBIT stood at $1.47.

Walmart Upcoming Earnings

Source: InvestingPro

The company is showing a cautionary signal as its momentum slows down despite ongoing growth. In the present scenario, Walmart's persistence in employing price-based strategies to uphold its standing could potentially have an adverse impact on its short-term profitability.

Nevertheless, if inflationary pressures ease, the company might be able to ramp up its growth momentum in operating profit over the long haul.

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Source: InvestingPro

Based on data from InvestingPro, when we summarize the overall state of the company, it's clear that profitability, growth, and cash flow are in good shape. The price momentum of WMT stock also looks promising.

The fair value assessment for WMT stock shows a gulf in calculations from financial models and estimates from analysts. As per 15 financial models, WMT's current fair value is assessed at $157, while analysts provide an average fair value estimate of $172.

WMT Fair Value

Source: InvestingPro

Target

Target, a significant retailer scheduled to reveal its second-quarter financial results this week, is anticipated to underperform compared to its competitors this year.

As a result, with 26 analysts revising their expectations downward for Target, the earnings per share forecast for the 2nd quarter on the InvestingPro platform appears to have decreased to $1.42. Additionally, the revenue forecast has been revised down by 6% to $25.42 billion.

Upcoming Earnings

Source: InvestingPro

Examining the company's overall state, challenges ahead encompass the declining trend in earnings per share, the downward adjustment of revenue projections, and the issue of short-term debt obligations surpassing liquid assets.

Though these factors impact the company's overall health, there's a need for improvement in areas such as cash flow, growth status, and price momentum.

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Source: InvestingPro

After facing challenges in recent periods, TGT stock is now trading at a discounted price compared to its fair value estimates.

In fact, InvestingPro's calculation, based on financial models, indicates a fair value of $155 for TGT, which represents a 20% discount when compared to its current price of $129. Similarly, the consensus estimate of 30 analysts aligns with a fair value of $157.

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Source: InvestingPro

Home Depot

Home Depot's recent earnings announcement surpassed expectations, even as it faced a 2% year-over-year decrease in its sales. This decline is largely attributed to customers taking a cautious approach when it comes to significant purchases and major projects.

This quarter's performance stands out as the first time in three quarters that the company has exceeded Wall Street's revenue forecasts. Specifically, for the quarter ending on July 30, Home Depot reported the following figures in comparison to the estimates:

• Earnings per share: $4.65, surpassing the expected $4.45
• Revenue: $42.92 billion, outpacing the anticipated $42.23 billion

Within this timeframe, the company reported a net income of $4.66 billion, translating to $4.65 per share. This marked a decrease from the previous year's figures of $5.17 billion in net income and $5.05 per share. Additionally, the revenue experienced a year-over-year drop from $43.79 billion.

In an interview, Chief Financial Officer Richard McPhail acknowledged the ongoing trend of consumers exercising caution when it comes to larger and more discretionary spending.

He noted that some homeowners had already undertaken significant expenses during the pandemic, while others might be delaying such expenditures due to the impact of higher interest rates.

Home Depot currently faces a more complex sales environment as the demand for DIY projects and contractors reverts to a more standard pattern after almost three years of unusually high demand.

McPhail had previously communicated that 2023 would be a year of moderation, as customers gradually return to more typical pre-pandemic spending patterns.

Taking into account InvestingPro's data, let's summarize the overall picture of Home Depot. Despite the expectation of a decline, the ongoing increase in earnings per share, the consistent dividend payments, and the relatively stable share price all serve as positive indicators.

However, it's important to note that the company's relatively high price-to-earnings ratio in comparison to its short-term profitability could potentially be a concern. Another aspect to consider is the company's current debt ratio, which remains at average levels and could be interpreted as a point of caution.

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